Falling from Olympus

Having more women on boards, formal whistleblowing policies, compulsory rotation of auditors and prison sentences for wrongdoers will help cut down on corporate fraud, says Michael Woodford.

Woodford, who was in Sydney last week to help launch the CFA Institute’s Investor First Week, is known for having exposed massive corruption at Japanese optics and reprography product manufacturer, Olympus Corporation.

Woodford worked for Olympus for 30 years, becoming the head of its European operations and then president and COO of its Japanese operations. Two weeks after being appointed as its first non-Japanese CEO in October 2011, he received evidence of a massive accounting fraud involving the $1 billion acquisition of three “Mickey Mouse” companies plus US$700 million paid to an unknown consultancy company in the Cayman Islands for mergers and acquisitions advice.

“It wasn’t a complex fraud,” says Woodford. “A child would have known that you don’t pay $1 billion for companies that don’t produce any turnover… You can only play those games in the Alice of Wonderland of Japan.”

He wrote six letters to the board and from letter number four onwards, he copied in the chairman and senior partners of Olympus’ auditors. He then commissioned an auditing firm in London to investigate the matter. It came back with a damning report.

Yet, despite all the evidence, all 14 of Olympus’ directors, including its three non-executive directors (NEDs), fired him immediately.

After turning over a file to a Financial Times journalist, Woodford fled Japan, fearing for his life. He subsequently exposed the fraud through massive publicity in the Western media and became one of the most highly placed executives to turn whistle-blower.

The scandal led to the resignation of the entire Olympus board and several arrests of senior executives, the company's former auditor and bankers, among others. And, it left Woodford even more cynical about human nature than he was before.

He says he had known many of his colleagues around the world for 30 years and some had been around for the birth of his children. “But an hour after I was dismissed, phone calls and texts went unanswered. People move away in a way that is haunting to see. I realise how arrogant I must have been in my judgement. These people are mostly still with the company and are bright and intelligent. But I thought they were decent and ethical… They would not help me. They excommunicated me. Most people in business will not get involved. The problem for whistle-blowers is the isolation.”

That’s why Woodford is a strong believer in whistle-blowing and has lobbied strongly for this via the UK charity Public Concern at Work, of which he is a patron.

“If there is some wrongdoing, then people in most organisations will know about it at some level. How do you get that information out? Because I was the president of huge company, a foreigner running the company, I could get the media’s attention. And I also had the [finances]. I spent $1 million pounds in 12 weeks on lawyers. The person I worry about is the junior manager in a company.” 

Woodford adds that it’s not easy to go to the media regulator or law enforcement unless you have substantiated evidence. Yet, most companies don’t have defined whistleblowing procedures.

He says every organisation, private or public, over a certain size should have defined whistleblowing procedures and that whistle-blowers should report to a NED.

“If you are a NED and things go wrong and you haven’t demonstrated oversight and scrutiny, you are personally liable. The NED will have to register the report from a whistle-blower, investigate and come back to the whistle-blower.

“We also need to put the bad guys in prison. While large companies may pay fines for wrongdoing, the regulators don’t go after individual officers.”

Woodford also believes that having more women in the boardroom may help avoid the problems experienced at Olympus.

“Macho, ego and vanity are not uniquely male traits, but they can create dominant or authoritarian leaders,” he says, noting that the Olympus chairman was like an emperor who people just bowed down to.

“Despite overwhelming evidence, they followed him blindly. That’s in Japan, but I have seen people behave like this all around the world.

“Powerful men need to be held to account. So it’s very important that there are NEDs on the board and that they really are independent. Overwhelmingly male boards are always a bad sign.”

Woodford was awarded a large settlement for defamation and wrongful dismissal from Olympus, reportedly of £10 million, and now consults on corporate governance and whistle-blowing laws. He has also published a book about the scandal, called Exposure, and vows never to work in corporate life again after his Olympus experience.